How to Refinance a Car Loan with Bad Credit?

How to Refinance a Car Loan with Bad Credit?


7 Min Read

Car loan refinancing is a smart way to negotiate a better interest rate or reduce your monthly payments. But if you have a bad credit score, it may be difficult for you to qualify for some refinancing options. The good news is that there are still loans available to those with low FICO ratings. Let’s find out how you can refinance a car loan with bad credit and when it really makes sense.

Key Takeaways:

  • Car loan refinancing with bad credit may help you reduce your monthly payment while increasing the total loan cost.
  • Bad credit borrowers may get a lower interest rate if their credit scores have improved since they obtained their original loan.
  • You are most likely won’t be able to refinance your current loan if you’re behind on car payments.

What Should I Know About an Auto Loan Refinance Process with Bad Credit?

An auto loan refinance process involves replacing your current loan with a new one that offers more beneficial terms. However, borrowers with credit scores between 300 and 579 are considered risky, so they usually can’t get favorable loan conditions.

Many lenders set a minimum credit score requirement of at least 600, while some of them only accept applicants with ratings of no less than 670. However, options for bad and poor credit still exist. The key thing you need to know is that the lower your credit score, the higher the projected interest rate will be.

Let’s take a look at estimated interest rates on a 60-month car refinance loan based on a borrower’s credit score according to RateGenius:

Credit Score Range APR
Poor (300-579) 13.43%
Fair (580-669) 9.81%
Good (670-739) 7.05%
Excellent (740-850) 5.68%

Keep in mind that bad credit borrowers may be asked to meet stricter eligibility requirements to get more beneficial loan terms. Otherwise, you may be offered an interest rate as high as 28% or even higher.

Can You Refinance a Car Loan with Bad Credit?

Borrowers might refinance a car loan with bad credit but are most likely to face limited options and less favorable loan terms. While traditional lenders usually work with good credit individuals, those with questionable credit backgrounds have to turn to alternative loan providers or bring an extra guarantee, such as a cosigner.

Additionally, applicants with bad credit will get higher interest rates than people with no credit issues. However, if an APR on the lending market has decreased from the moment you got your current loan, you may still benefit from this solution.

When Auto Loan Refinancing with Bad Credit Is a Good Idea

Auto refinancing only makes sense if you can get a loan at a lower APR than your current one or reduce your monthly car payment. Here are a few situations where the decision will be worth it:

  • Your credit score has improved since you took out your original loan. This way, a lender may offer you a better APR;
  • You struggle to make your current monthly payments. A refinance loan obtained for a longer period can help you reduce the amount you pay each month. Just keep in mind that a lower monthly payment may also result in a higher interest over the loan life;
  • The lending market experienced an interest rate decline. If an APR drops across the entire lending market, it may be an ideal moment to refinance your car loan;
  • You got a captive loan. This means that you borrowed money through a dealer and were not able to compare offers and choose a lender with better terms. Thus, it may be a good idea to explore alternatives.

discover your loan options with no credit impact

When Should You Avoid Auto Loan Refinancing with Bad Credit?

Although auto loan refinancing seems tempting, it may not work for some. Here’s when it may not make sense:

  • Your credit score has dropped since you bought a car. A lender can only offer you a lower APR if you demonstrate responsible financial behavior;
  • You have an upside-down car loan. This term means that you owe more on your auto loan than your vehicle is worth. Many lenders don’t refinance loans with a high loan-to-value ratio;
  • Market APRs are higher. If car loans experience interest rate hikes, it’s not the right time to refinance.

How to Refinance a Car Loan with Bad Credit?

Here are a few steps to take to refinance a car loan with bad credit.

Check Your Credit Reports

Request free copies of your credit reports from three major credit bureaus and make sure they don’t have mistakes. As a higher credit score typically results in a lower interest rate, it’s a good idea to correct all the inaccuracies before you get started.

Contact Your Current Loan Provider

Even if your lender doesn’t refinance its own auto loans, reaching out to it may streamline the entire process. If the loan provider doesn’t have such restrictions, you may even get a better loan deal for having a preexisting account in good standing.

Compare Lenders

Shop around and compare offers from several loan providers to make sure you don’t overlook the best deal. Pay special attention to APRs, extra fees, repayment terms, and guarantees. Many lenders now allow you to pre-qualify and get a preliminary offer without affecting your credit score.

Choose a Lender with the Best Possible Terms

Pick the best offer from all the options available to you and apply. Some lenders allow an online loan application, while others may require you to visit a physical store. Ask your loan provider about the documents and information you need to provide and gather it in advance.

Best Auto Refinance Lenders to Consider

Explore the lenders offering the best refinance loan options for people with bad and poor credit.

Lender Starting APR Minimum Credit Score Repayment Terms Loan Amounts Best for
CarsDirect 5% Not specified Vary by lender Vary by lender Offers from multiple partners
Auto Credit Express 5% Not specified 35-72 months $5,000 – $45,000 Specialization in bad credit refinancing
Open Road Lending 7.9% 460 36-72 months $7,500 – $100,000 Low credit score requirements
MyAutoLoan 4.99% 600 24-72 months $5,000 – $100,000 Quick disbursement times

How We Picked Auto Refinance Loan Lenders

We collected information from dozens of lenders on the market and closely reviewed their terms and eligibility criteria, paying particular attention to bad credit tolerance, flexible repayment terms, and reasonable starting interest rates. We were also focused on customer experience and read borrower reviews to make sure the lender maintains a high reputation.

Alternatives to Refinancing a Current Auto Loan

If refinancing your car loan doesn’t seem possible for some reason, consider the following alternatives:

  • Trade in. This option allows you to use the appraisal cost of your current vehicle to buy a new car. Depending on your auto and how much you owe, you may get a more affordable option and transform your outstanding balance into a new loan;
  • Work with your current lender. Ask for a deferment plan or request a loan modification if you struggle with your current loan payments;
  • Ask your family for help. Ask your loved ones whether they can help you cover your existing debt and offer more flexible terms.

Borrowers with bad credit scores can also turn to assistance programs or consider a few ways to boost their credit to access lower interest rates in the future.

Bottom Line

If used wisely, auto loan refinancing can help you pay less interest on your car loan or reduce your monthly payment amount. While there are several options available to borrowers with bad credit, they usually come with higher interest rates and less favorable loan terms. However, this solution may be worth considering under certain conditions. Just make sure you make all the calculations and choose a reliable lender to work with.

Quick Loan Decisions with No Credit ImpactApply

Michael Lefler

Written by Michael Lefler

Written by Michael Lefler

Mike Lefler shares his interest in a wide range of different subjects, including his love for finance-related writing. His passion for writing and his years of study led him to become one of the brilliant authors in the massive finance arena and in the area of Financial Planning and Lending Industry.

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